Wednesday, September 10, 2014

Paul Krugman: You're so vain you probably think this piece is about you

Paul Krugman: "We’ll Only Feel Prosperous During Bubble Periods"

While hardly able to match the wit, sophistry or, allegedly, satire of yesterday's MarketWatch grandslam in market insight "Why This Stock Market Will Never Go Down", we are confident readers will enjoy the following interview from none other than the Nobel prize winner in Keynesianomics, Paul Krugman, who in this interview with Princeton Magazine, had some comments on bubbles, inflation,  student loans, minimum wages, artificially low rates, the Fed's dual mandate, and, of all things, Bitcoin.

From Princeton Magazine:
Are bubbles good or bad and do we need them to create strong economic growth and reach higher levels of employment?
Bubbles are bad if you have an economy near full employment, where they divert resources from their proper use and set the stage for financial instability. In a depressed economy, even ill-conceived spending can help create jobs, so bubbles aren’t necessarily bad. There are reasons to believe that we’re facing an era of persistent economic weakness, which means that we’ll only feel prosperous during bubble periods.

First, there is no attempt to define what a "bubble" is or what creates it.  It is pretty obvious to any trained Austrain Economist that a bubble is created when a central bank prints money and then gives it to the big banks for practically nothing (zero interest) which is the official monetary policy in the US currently.  The creation of money "out of thin air" increases the money supply and eventually leads to an increase in prices across the board.  In the US we are able to "export" our inflation to other countries that are forced to use the dollar as the dollar is the "reserve currency" of the world.  This allows us to print a lot more money than say Argentina or Venezuala, two countries which have reached the end of their money printing schemes resulting in depression and eventually revolution.  This is also why the US must start wars around the world in order to defend our "reserve currency" status. 

If you don't believe me ask yourself what Iraq, Iran, Syria and Libya have in common besides being attacked by the US?  They all tried to create "work arounds" to the dollar which the US cannot have.  Why can't we have it?  Well if the dollar were no longer the reserve currency of the world, all of the inflation that we have exported over the years would quickly come back into the US and hyperinflation would occur.  Why would this happen?  Other countries hold on to the dollar as they are forced to pay for oil with dollars, due to a deal that Henry Kissinger made with Saudi Arabia in the 1970's.  Ok, so what, you ask?  Well if they are no longer forced to buy their oil with dollars, then they will no longer have to keep excess reserves of dollars and will sell them, which will result in a flood of dollars returning into the US all at once.  Ok again so what you ask?  Well for one it could cause the price of gas to rise closer to $8 a gallon.  Could you afford that?  The increase in the costs of gas and oil would quickly ripple throughout our economy because the costs of shipping products around the country would increase and those costs would be passed on to you the consumer. 

So Krugman is partially correct with the first sentence and this is the point that Austrian Economics makes.  When the costs of money, otherwise known as interest rates becomes too low, companies will borrow money and then invest it in a fashion that they would not normally invest.  If I asked you to play fantasy football with me and said the costs to enter my league was $500 most people would say no, that is too rich for my blood.  If however, you asked your grandmother if she would give you $500 so you could play and she said sure sweetie, here you go, well then that's a different story altogether now isn't it?  That's called malinvestment.  Sure there's a chance that you could win a lot of money if you won the fantasy football championship but there's also a chance you could lose $500.  Is investing $500 in the chance that you might win a good investment or a risky investment?

This is the choice that many businesses are facing.  They have access to all this easy money that costs practically nothing so why not invest in the stock market or start that new line of dog clothes or soap on a rope, or perhaps try to recreate the beanie baby craze from the 1980's?  Do you see how having easy access to low costs (by costs I mean interest rates, which are defined as the "cost of money") could lead to poor investment decisions?

Sure the stock market may go up and your dog clothes line may become the next big trend but just like soap on a rope eventually everyone who wants to buy the product has bought it and sales begin to decline and eventually your soap on a rope line goes out of business.  Why?  Mostly because it's a bad idea and you produced a product that no one really wanted.  If your access to free money was more limited perhaps you might have thought more about your ill fated move to create a product that no one wanted.   

So then Krugman goes on to defend bubbles and say that during a depression it's ok to blow a bubble to get the economy back on track.  If that seems like exactly what happened during the housing bubble that's because it is.  The Federal Reserve created lots of money, handed it out to the banks and the banks lent it out to us, the general public, at much higher rates than they got it for.  So what happened?  Well people began to buy houses because "housing prices never go down" is what people like Krugman said.  When you create artificial demand by giving the banks "free money" it creates artificial price increases.  So the price of housing became overinflated and as they say, what goes up must come down.  And it did in a big way in 2008.

So that was an example of doing precisely what Krugman says to do, create a bubble during a depression.  It worked great for several years but then almost led to an economic implosion of the US economy(technically it did implode it was just papered over with more debt).  What people like Krugman never seem to realize is that there are always unforeseen or unintended consequences to human action.  No matter how many times they get burned they just can't look into the future and think, hmmm, maybe giving out home loans to people who can't afford it will have adverse consequences one day.  Nope, just do what Krugman says, things go great for a while and by the time the "chickens come home to roost" so to speak, everyone will have forgotten how Krugman advocated for blowing a bubble several years prior.

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New York’s minimum wage is currently $8 per hour.  Germany is introducing a national minimum wage next year of 8.50 euros, equivalent to $15 an hour. Swiss voters recently rejected increasing their minimum wage to 22 Swiss francs or nearly $25 per hour. What would you like to see the minimum wage be in the US?
I’m for raising the minimum to something over $10 nationally, which would bring it back in real terms and as a share of average non-managerial wages to its level in the 1960s. High-productivity centers, like New York, could justify going higher.

Krugman is correct inflation has increased which has made everything more expensive, which makes it harder for those who earn $7.25 an hour to make ends meet.  However, there is no discussion of how raising the minimum wage will result in a decrease of jobs for those without employable skills.  If the McDonalds employees are successful in raising the minimum wage they will quickly be replaced by robots and there will be no minimum wage jobs left.  There is also no mention of why there is inflation, it is just assumed that inflation is necessary.  It's not.

Did you know that from the period of approximately 1850-1910 the US had no central bank (thanks Andrew Jackson!!!) and therefore there was no inflationary monetary policy in the US?  Guess what happened during that period?  The US expanded exponentially, we invented cars and railroads and airplanes and all other kind of products that made everyone's life easier.  The producers tried very hard to continue to bring the costs of their goods down so that people could afFORD them.  Like Henry Ford that is.  We were a very prosperous nation and growing more prosperous each year.

It is the purposefully inflationary policies that the Federal Reserve follows that have made it so that it is impossible to make ends meet for $7.25 an hour.  Go back and ask someone from 1965 if they would take a job making $7.25 an hour, what do you think that they would say?

But why would our own money making entity, the Federal Reserve want inflation you ask?  Wouldn't that be bad for them as well?  Actually no, it's great for them because every thing that they do is financed by debt so they want inflation, the more the better.  Let's say in 1965 I loaned you $1000 and said pay me back in 2014.  $1000 was a lot of money in 1965, you could have used that money to invent the pet rock and made millions with it right?  Or maybe you invested $1000 to buy an original piece of art from Andy Warhol.  Or maybe you bought a car that allowed you to get a job that paid more than the job you were currently working at.  My point is, when you paid me back the $1000 in 2014 it wouldn't really be all that painful now would it?

How has studying economics at a Ph.D. level changed since you were a student?
I’m actually struck by how little it has changed. The basic structure of course-work that lays a foundation, followed by dissertation, is the same; the math and statistical level has risen, but it was already pretty high in 1975! The content of some fields has changed, of course, mostly though not everywhere for the better. On the whole, though, the structure both of education and of the career track for young economists has been remarkably stable. I think that’s starting to change now, as the web and the proliferation of think tanks shake up the sources of career success. But that’s just happening, after decades of stability.

This comment by Krugman really makes me laugh.  He is struck by how little it has changed.  Except for the whole explosion of Austrian Economic thinking across the entire world.  With the invention of the internet, the gatekeepers of information have been eliminated and now people can learn about alternate forms of economic theory.  Krugman is an advocate for an economic theory called Keynesian economics, which essentially says if you have too much debt, just go more into debt to take care of the initial debt.  Well what about the new debt you ask?  See step one, use more debt to pay that off and so on and so forth. 

If that leaves you asking the question don't you have to pay it off eventually don't worry because according to eggheads like Krugman in the long run we will all be dead anyways so what does it matter?  If that doesn't sound like a good answer to you, that's because it's not.  Eventually the Piper has to be paid.  Remeber when Tony Soprano lent that guy money so he could continue playing poker to win his money back.  Guess what? He didn't win his money back and Tony and the boys took over his store, took what they wanted and ruined his credit.  Tony's daughter even got the guy's car out of the deal.

So how did the whole borrowing more money to get himself out of debt work out for him?  The Federal Reserve really isn't that much different than Soprano's gang.  Throughout history, central banks have blown bubbles and inflated prices, sold at the top, which is a lot easier to do if you are told when the top is by the people who are "in the know", waited for the crash and then buy back everything at pennies on the dollar.  This is the essense of what economic cycles are.  They are economic scams run by the flim flam men who own the Federal Reserve to con us the gullible public into investing in the stock market when it is red hot and then bilking us for all our money only to buy it all back later when the assets are dirt cheap.

Advocates for Austrian Economics have exposed this fraud and the internet has allowed people to understand these concepts.  The gig is up, it's only a matter of time before we reach a tipping point where enough people understand the scam and demand recompensation.  Throughout history this has been achieved through the use of rope and something called a guillotine.

Do you have any concern that mounting student loan debt will eventually impact the economy and housing market?
It’s already happening. Household formation is very low, and debt has to be part of the explanation.

Again no mention of the structural problems caused by the government.  Without the Federal Reserve giving away free money to the banks there is not as much of an incentive to give out so much in student loans.  Without the government's policy to not allow students to discharge student loans in bankruptcy and forced payroll deductions for unpaid student loans then the banks would not be so eager to hand out money to students who enroll in college to study subjects that will not enhance their ability to get ahead economically.  Without such easy access to student loans to pay for college, colleges would not be able to pay their professors who teach irrelevant subjects, like Chicano studies way more money than supply and demand dictates. 

And the cycles continues, free money for the banks, student loans for any student who asks for it regardless of whether what they are studying makes economic sense and increased salaries for teachers who are overpaid, which in turn leads to increases in tuition.  On and on it goes...  until one day it just doesn't anymore.  Just like the housing bubble, eventually people will just stop paying their student loans regardless of the consequences and BAM another crash similar to the crash in the housing market except this time it will be a crash in student loans.  And once again, NOBODY WILL HAVE BEEN ABLE TO HAVE SEEN IT COMING!!!  Except anyone who understands Austrian Economics.  Read Von Mises, Read Lew Rockwell, Read Murray Rothbard, Listen to Tom Woods, they all know what is coming and can explain it very clearly.

How much inflation is appropriate and why has the inflation rate remained low despite the expansion in the money supply?
Inflation is a tradeoff—higher inflation raises some costs of doing business, but low inflation or deflation have the effect of prolonging slumps. In the ’90s there was a sort of consensus that 2 percent made the most of that tradeoff, but subsequent experience shows that the costs of low inflation are much bigger than we thought. So I’d advocate something like 4. As for why inflation hasn’t picked up—both theory and historical experience told us that in a depressed economy with near-zero interest rates increases in the quantity of money would just sit there. Some of us were saying that over and over back in 2009 and 2010; what will it take for people to admit that we were right?

There are way too many variables for ANYONE no matter how smart or how educated to be able to determine what the perfect inflation rate is to create "full employment" or whatever it is that these con men bankers are trying to achieve these days.  All of their theories and equations cannot determine this as their is one factor that throws off any equation and that is called HUMAN ACTION.  People act in their own interests and it cannot be quantified with economic calculations.  Maybe Harry Seldon could do it, but Paul Krugman is no Harry Seldon.

This is the whole premise behind a little known movie called the Wizard of Oz.  If you have never seen it or heard of it try to rent it some time.  The yellow brick road is made of what?  Gold perhaps?  Does the City of Oz represent DC?  Is the man behind the curtain representative of the Federal Reserve Chairman?  Do a google search on this correlation you might be surprised what ol' Frank L. Baum was really trying to say.

So what's the perfect rate of inflation?  It is whatever the market says it is at that given point in time.  That's it, no more no less.  The Central banks of the world try to control factors that cannot be controlled, and when it doesn't work then they just change the equation to make it fit their theory.  Pretty good work if you can get it.

And don't you just love how at the end he just whines, oh and when are people going to give me credit for being right?  Please I can't live without your love and adoration.  This guy is mentally unstable, I would not want to sit down and have a beer with him, I do not think he is a good guy trying to do the best he can with information that by nature is limited.  He is a self serving pric, plain and simple.  He is a narcissist who probably spends an hour a day grooming his beard to look just right.  No Krugman YOU ARE NOT RIGHT, the reason that inflation did not increase is because we exported our inflation to other countries around the world who are forced to use the dollar to buy oil.  Oh and there were some consequences to this as well, see the ARAB SPRING and the collapse of the Argentina Bond market for two examples you whiny little bitch.

Please comment on how artificially low interest rates have impacted the current value of baby boomers’ retirement portfolios and should this be a consideration of the Federal Reserve?
Oh, boy. What do you mean “artificially low”? Compared to what? The appropriate level of the interest rate, most economists would say, is the rate that gives us full employment without inflation; since we don’t have full employment, that says that rates are too high.
And no, the Fed’s job is to stabilize the economy, not to protect incomes of some groups at the expense of that mandate.

So the Fed's job is to "stabilize the economy" Krugman says.  Wait I thought their job was to create full employment?  Even better, I thought that the Fed was created to save banks who were on the verge of failure.  I thought it was created to ensure that we no longer had bank runs and to serve as a bank for the banks.  Man this gets confusing after a while trying to determine what the real reason for the Federal Reserve is.

There is only one reason for the Federal Reserve.  That is to make sure that the really rich and powerful families who came up with the idea to create a central bank (again... in the dead of night, in a secret location) stayed really rich.  Ever notice when they come up with the richest men in the world list you never see the Rockefeller name on that list or the Rothchild's or maybe the Queen of England or the JP Morgan family?  Let me tell you something, these families were rich in 1913, do you really think that they are no longer the richest families in the world?  They are and they are by a long shot, but they don't want you to know it.  So they create these lists and they put Bill Gates, and Carlos Slim and Richard Branson on these lists but these families who created the Federal Reserve are rich enough to buy and sell 100 Carlos Slim if they wanted to.

Actually there is another reason for the Fed.  That is to allow countries to spend beyond their means and to finance wars without having to impose a direct tax burden upon the American people.  We have paid for every war since WWII with a credit card and eventually the bill will come due.  People like Krugman will tell you debt doesn't matter.  And he's right it doesn't matter, until one day it does.

Do you think Bitcoin will gain momentum and become a viable currency?
No. I could be wrong, but Bitcoin is harder to use than other forms of electronic payment, and lacks any fundamental source of value (unlike dollars, which can be used to pay taxes). It’s possible that Bitcoin will somehow become self-supporting, but for now my guess is that it’s largely a fad that will collapse one of these days.

He is wrong on bitcoin as well, but I don't have much to say on this subject.  Time will prove him wrong again just like it did with this gem of a quote from Krugman below.

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As a quick reminder here is what Krugman said about the internet and technology in 1998.
The growth of the Internet will slow drastically, as the flaw in 'Metcalfe's law'–which states that the number of potential connections in a network is proportional to the square of the number of participants–becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's.... As the rate of technological change in computing slows, the number of jobs for IT specialists will decelerate, then actually turn down; ten years from now, the phrase information economy will sound silly.

So in conclusion, F*&% Paul Krugman!!! Him and his ilk(other Keynesian economists) justify our rogue government's ability to wage wars across the globe in the name of democracy.  There is blood on his hands, just as their is blood on Obama's hands.  Him and people like him who offer excuses for why it's ok for the Fed Gov to borrow as much money as they want to finance any war that they war to start for any reason always justified by American Exceptionalism are enablers.  The Fed Gov is addicted to debt and the Krugman's of the world make excuses for them and enable them to continue their destructive ways by convinving others that it is ok.  IT'S NOT OK!!! There is no need for a Central Bank, that pit of vipers needs to be removed from our country as soon as possible.

You may say, wow overreact much?  In time we will see who is right, and unfortunately I'm afraid it will be me.